Researcher ORCID Identifier
0009-0003-5963-7145
Graduation Year
2025
Date of Submission
11-2024
Document Type
Campus Only Senior Thesis
Degree Name
Bachelor of Arts
Department
Economics-Accounting
Reader 1
Matthew Magilke
Terms of Use & License Information
Rights Information
© 2024 Aaron Morales
Abstract
This paper examines whether classification shifting by public U.S. firms increased during the COVID-19 pandemic. The adverse economic conditions created by the COVID-19 pandemic presented a unique opportunity for managers to inflate core earnings by shifting expenses to income-decreasing special items, realizing potential benefits for firms in enhanced investor assessments but reducing the reliability of financial statements and increasing the risk of investor losses. Using a modified version of McVay’s (2006) model to measure classification shifting developed by Abdalla and Clubb (2023), I find no evidence that classification shifting increased during the pandemic. Though I found that the significance and magnitude of classification shifting depended on industry classification, I also found no evidence that those industries most adversely affected during the pandemic increased classification shifting. My findings imply that investors are not at an increased risk of losses or that the reliability of core earnings fell due to increased classification shifting during the pandemic. My findings also imply that industry and the level of discretion in related industry-specific income-decreasing special items play a significant role in the prevalence of classification shifting.
Recommended Citation
Morales, Aaron, "No Shifty Business: Investigating the Effect of the COVID-19 Pandemic on Classification Shifting" (2025). CMC Senior Theses. 3719.
https://scholarship.claremont.edu/cmc_theses/3719
This thesis is restricted to the Claremont Colleges current faculty, students, and staff.